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China revs up local car market with small-engine tax cut

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China has decided to halve sales tax on small cars from Thursday, boosting local auto shares, as the government tries to revive growth in the world's largest car market.

The tax cut will run until the end of 2016 and apply to cars with 1.6-liter engines or smaller, a segment that accounts for nearly 70 percent of total sales in China.

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The move, announced by cabinet late on Tuesday, sent shares of major Chinese automakers higher on Wednesday, with Great Wall Motor jumping 5 percent in Shanghai in early trade. Its Hong Kong stock surged more than 10 percent.

Other carmakers BYD, BAIC Motor and SAIC Motor also rose sharply.

However, analysts at fund manager Bernstein said the move was unlikely to lead to a turnaround in the overall market.

Car sales in China, the world's biggest market since 2009, were flat in the first eight months of the year and could contract in 2015 for the first time since the market took off in the late 1990s. In August, sales fell 3 percent from a year earlier to 1.7 million vehicles.

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Many analysts expect auto sales growth to hold in low single-digits in coming years and global carmakers are cutting production and reining in wages and other costs.

Last month, China's central bank provided support for auto financing firms by slashing the amount of reserves they need to hold by 3.5 percentage points.

However many analysts said this move was unlikely to lead to any sharp rises in sales given the relatively low auto financing rate.